Insurance Groups Supervision Implementation in a Member State

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Insurance Groups SupervisionImplementation in a
Member State

• Istanbul
• 8 February 2008

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Main points

• Adaptation of the Insurance Groups Directive (IGD
  98/78/EC) into French law
• Practical implementation of group supervision
• Towards Solvency II

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Main points

• Adaptation of the IGD into the French regulation
• Practical implementation of group supervision
• Towards Solvency II

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Adaptation of the IGD into the French regulation

• Scope of group supervision
• Adjusted solvency margin calculation
• intra-group transactions
• Internal control processes
• Fit proper requirements
• Treatment of solo undertakings in a group
  context

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Scope of group supervision

• Parent undertaking, subsidiaries and
  participations
• Including participations in other financial
  sectors
• Reinsurance groups are also concerned
• Groups in which links between entities do not
  result from capital holdings wider concept of
   related undertakings 
• Common managers, single management
• Combined accounts

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Adjusted solvency margin calculation

• Directive 98/78/EC allows for 3 methods
• Requirement deduction method
• Deduction and aggregation method
• Accounting consolidation-based method
• Under French regulation
• Use of the consolidated/combined based method
• Two other methods can be used, for particular
  group structures, in exceptional circumstances,
  after authorisation of the ACAM

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Eligible elements

• Use of the released consolidated accounts to
  determine eligible items for the solvency margin
  at group level
• Eligible items based on the solo rules, subject
  to availability and transferability adjustments
  (e.g minority interests, subordinated debt,
  profit reserves)
• Consequences if accounts are released under IFRS
  international standards, application of
  prudential filters
• so as to make the results the same regardless of
  the rules used for consolidation
• Less burden for groups than making separate
  statutory accounts for prudential matters.

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Minimum solvency margin requirement

• Calculation of the solvency margin requirement at
  group level for insurance reinsurance
  activities
• In practice, sum of the solo requirements of
  the undertakings belonging to a group (with the
  application of a percentage used for the
  consolidation)
• Insurance related undertakings
• Reinsurance related undertakings
• Third countries insurance reinsurance
  undertakings

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Treatment of non-EEA related entities

• Implementation of IGD
• By analogy, as if the related undertakings were
  EEA undertakings
• Solvency I rules
• Alternatively, local requirements can apply if
  the rules are at least comparable to Solvency I
• Local requirements can be taken into account
  (capital requirement and available capital)
• Ex Life activities methods of valuation of
  technical provisions may significantly impact the
  available capital - must be taken into account
  in the comparison with European rules.
• Cooperation agreements with third countries
  supervisors

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Treatment of cross-sectoral participations

• Under French regulation, two methods allowed
• Deduction of the value of the participations from
  the available solvency margin
• Or consolidation (as if the group were a
  financial conglomerate)
• Capital requirement in the sectoral rules
• Eligible own funds in the sectoral rules
• NB Exercise of an option provided by IGD

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Intra-group transactions (1)

• Directive 98/78/CE
• sets out requirements for the supervision of
  intra-group transactions regarding
• Loans
• Guarantees and off-balance-sheet transactions
• Elements eligible for the solvency margin
• Investments
• Reinsurance operations
• Agreements to share costs
• Undertakings belonging to groups to report at
  least annually on significant intra-group
  transactions as described above.

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Intra-group transactions (2)

• Adaptation of the Directive into French
  regulation at group level
• Principle ex-post supervision of significant
  intra-group transactions
• Annual frequency of reporting
• Forms part of the annual supervisory reporting of
  solo undertakings included in the supervision
  of a group
• At group level, reporting on intra-group loans
  (together with the calculation of the adjusted
  solvency margin)

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Intra-group transactions (2)

• Content of the reporting on intra-group
  transactions for undertakings belonging to a
  group
• Internal reinsurance
• Ceded premiums, technical provisions, claims,
  results per reinsurance
• Threshold for significance (in percentage of the
  technical provisions and the gross technical
  result)
• Investment flows
• Sales/purchases of real estate or other external
  assets (non listed)
• Threshold 5 of the required solvency margin

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Intra-group transactions (3)

• Agreements for sharing costs
• Risks jointly borne
• Co-insurance or co-reinsurance poolsetc.
• Transactions with a natural person
• Concern natural person that holds participations
  in the undertaking
• Inventory of the supply of funds
• Threshold 5 of the required solvency margin
• List of off-balance sheet intra-group commitments
• Threshold 5 of the required solvency margin

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Internal control processes (1)

• Requirements under IGD
• General requirement adequate internal control
  mechanisms in place for the production of any
  data and information relevant for the purposes of
  such supplementary supervision
• Specific requirement regarding risk management
  and internal control processes related to
  intra-group transactions

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Internal control processes (2)

• Additional requirement under French regulation
  report on internal control
• Annual presentation of a report approved by the
  board of the group to the supervisor on internal
  control processes
• Contains aspects related to (inter alia)
• Governance
• Organisation of the internal control processes
• Investment, asset/liability management policies,
  derivatives
• Underwriting policy, reserving policy
• Procedures for the establishment of released
  accounts

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Fit proper requirements

• Requirement regarding the management body of
  insurance holding companies
• Holding companies are unregulated entities not
  subject to authorisation
• Need for specific rules, in addition to fit
  proper rules that apply to insurance
  reinsurance undertakings

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Treatment of intra-group participations/subordinat
ed loans at solo level

• Main objective of IGD
• eliminate double gearing and intra-group creation
  of capital at the level of the group
• The solo EU legislation
• provides with different options for the treatment
  of intra-group participations or subordinated
  loans at solo level, mainly
• Deduction
• Like a group calculation (consolidation)
• No deduction nor consolidation
• Adaptation under French rules
• Nor deduction nor consolidation at solo level
  if the participation in question is taken into
  account in the groups adjusted solvency margin
  calculation
• Otherwise, deduction

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Main points

• Adaptation of the IGD into the French regulation
• Practical implementation of group supervision
• Towards Solvency II

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Group supervision is a supplementary supervision

• Solo supervision is the bedrock for group
  supervision
• assessment of the financial situation of solo
  undertakings
• level of technical provisions, coverage of
  technical provisions with appropriate assets,
  solvency margin
• Other qualitative requirements
• investment reinsurance policies, internal
  control, stress tests under deteriorated
  financial markets conditions

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Supervision of cross-border groups a key
challenge for group supervision

• Key challenge supervision of cross-border
  groups
• Each solo supervisor is responsible for solo
  supervision in their Member State
• Necessity to put in place mechanisms of
  cooperation
• Between supervisors in charge of the supervision
  of the undertakings belonging to a group
• Cooperation with third countries

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General framework for cooperation between EEA
supervisors (1)

• The texts at EU level
• Directive 98/78/CE does not state the framework
  for coordination between supervisors
• Helsinki protocol sets out the framework of
  cooperation between EEA supervisors in the frame
  of group supervision
• co-ordination committees

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General framework for cooperation between EEA
supervisors (2)

• Works of CEIOPS on group supervision
• Main aim fostering cooperation between EU
  supervisors
• Share views in order to improve the global
  efficiency of the group supervision
• Guidelines for co-ordination committees
• Less administrative burden for groups
• Develop joint initiatives among supervisors

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Co-ordination committees (1)

• Co-ordination committee
• Gather all EEA supervisors in charge of the
  supervision of the groups entities
• A lead supervisor for each European group
• Appointment decided at unanimity by the
  Co-ordination committee
• In general, supervisor where the parent
  undertaking is established
• The lead supervisor is chairing the
  co-ordination committee
• Assumes the responsibility of co-ordination
  supervision at group level
• is in particular responsible for checking the
  adjusted solvency calculation and forward it to
  the co-ordination committee

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Co-ordination committees (2)

• Practical operation of co-ordination committees
• Depend on the structure of groups and number of
  supervisors involved
• Annual face-to face meetings in going concern
  situations other contacts during the year
• Discussion on the adjusted solvency margin
  calculation and distribution of capital within
  the group
• The lead supervisor to check the calculation
  made by the group
• With the collaboration of the other supervisors
  involved
• Assessment of the adequate repartition of capital
  within the group
• 
  

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Co-ordination committees (3)

• Joint initiatives
• In certain circumstances, the same kind of risks
  can be borne by entities from different Member
  States
• The aim is to agree on a common treatment of such
  risks on a prudential perspective so as to reach
  consistency across different entities of a group
  and an appropriate treatment at group level

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Main points

• Adaptation of the IGD into the French regulation
• Practical implementation of group supervision
• Towards Solvency II

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New framework for group supervision

• Concentration and internationalisation of the
  insurance sector
• A framework that better fits with the way groups
  are managed
• Centralisation of governance functions,risk
  management,internal control, development of
  internal models
• while solo entities remain the only liable
  towards the policyholders
• ? Reinforcement of group supervision

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Proposal of Directive

• Issued in July 2007
• Innovative framework proposed still under
  negotiation
• Validation of the group internal model lead by
  the group supervisor, in collaboration with other
  supervisors involved
• Framework that allows for diversification effects
  between entities in the calculation of the
  capital requirements at group level
• Also proposes more flexibility in the capital
  management of groups (under conditions)
• Solo entities to cover their MCR only,
• Group to cover its group SCR
• Issue of the management of crisis situations

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Challenges ahead for group supervision

• Today Solo supervision is an essential matter
  for an efficient supervision at the level of the
  group
• With Solvency II Group supervision will be an
  essential matter for an efficient supervision at
  solo level.
• Strengthening of the role of the group
  supervisor
• Group supervision to impact solo supervision

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Thank you for your attention

Questions ?
Contacts helene.denis_at_acam-france.frfrancois.t
empe_at_acam-france.fr